RBA staying cool as the heat rises

Dick Smith can survive, says founder

Entrepreneur Dick Smith explains why he doesn't own shares in the company that bears his name.

JB Hi-Fi's product range is most strongly aligned with Dick Smith and broker Citi suggests the closure of about 100 Dick Smith stores could deliver JB Hi-Fi an earnings uplift of about $19 million in 2015-16.

Analyst Craig Woolford said the closure of up to half the Dick Smith stores was the most likely outcome of the administration "with a new owner taking a business with 25 per cent to 50 per cent fewer stores."

It is believed Bill Wavish has a lot to answer for. Photo: Jesse Marlow

BSR has experienced steady sales growth in recent years but Mr Cunningham said the operation spanned a lot of different categories.

He said Dick Smith's main market, consumer electronics had suffered from 10 years of price erosion.

The Dick Smith model will have to change, it won't survive in its current format and I'm not sure there's room for it.

BSR Group chief Graeme Cunningham

"The Dick Smith model will have to change, it won't survive in its current format and I'm not sure there's room for it," Mr Cunningham said.

"The area Dick Smith is playing in, JB Hi-Fi is also very strong...and Dick Smith lost the battle, for it to have a future they will have to diversify."

J P Morgan said Dick Smith was likely to consider the closure of unprofitable stores as part of the voluntary administration process as was an exit of its alliance with department store David Jones.

Analyst Shaun Cousins said JB Hi-Fi would be the biggest benficiary of any Dick Smith store closures but Harvey Norman could reap some modest upside, especially if Dick Smith opted to close stores in regional locations.

Dick Smith's expansion into small appliances as well as its strong focus on private label products was questioned by a number of prominent retailers yesterday as was the speed of its decline.

One high profile retailer, who would only talk anonymously blamed Dick Smith's demise on clever accounting.

"They used every accounting trick in the book, whether you pay for it this year or next year you always pay for it eventually," he said.

"$1.5 billion worth of value has been destroyed if you add up what Woolworths wrote off in the sale, what the banks are now owed, the debt to unsecured creditors and the float, it's a $1.5 billion hole.

"And they haven't build any market share or customer equity."

The fiercest criticism was saved for private equity operator Anchorage Capital Partners, which took control of Dick Smith in 2011 after negotiating a deal worth about $115 million and then listed the business through a $520 million public float less than two years later.

One high profile retail executive said Anchorage and former Dick Smith director Bill Wavish had a lot to for answer for.

"It's all about greed, investors think they are going to get something fantastic but all private equity does it dress up these businesses up for sale," he said.

"Bill Wavish has a lot of answer for, he was also the guy who put Myer out at about $4 (a share)... he floated these businesses, walked away with millions and left investors seething."

He also questioned how a business could go from making a profit in September to going into administration in January.

"That's only four months apart, there has got to be something wrong with that."

Dick Smith's banking syndicate, including NAB and HSBC subsequently appointed Ferrier Hodgson as receiver and it has called for expressions of interest in buying the operation as a going concern.

This follows two damaging profit downgrades in late 2015 as well as a $60 million inventory write-off in November, which saw its share price trade as low as 20c, a faction of its $2.20 listing price from two years earlier.

It's not obvious who will buy Dick Smith and some experienced retailers are sceptical anyone will want to take on the business in its current state.

One market watcher said Dick Smith's focus on private label was a mistake as was its decision to diversify into small appliances, an area that did not resonate with its techy brand.

He said in a highly branded environment like electronics, consumers were less likely to adopt private label.

"A brand in a promise and people want to know they aren't going to have issues with their purchases."

Retail consultant Brian Walker said Dick Smith started life as a niche business that spoke to "techies" who were interested in upgrading and repairing thier own equipment.

"Consumer behaviour has shifted dramatically because technology has become much cheaper and we're no longer a nation of repairers, we just throw stuff out now," Mr Walker said.

Dick Smith's decision to abandon its nerdy roots and take on major players like Harvey Norman and JB Hi-Fi left it "stuck in the middle" according to retail consultant Steve Kulmar.

He said the business started out as an operation that appealed to hobbyists but more recently it had broadened its range without redefining its brand.